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Thursday, November 3, 2016

Sukanya Samriddhi Yojana: Important watchouts before you invest

An SSY account can only be opened in the name of a girl child
(beneficiary) below 10 years, as on the date of the opening of the account.

Sukanya Samriddhi Yojana (SSY) is targeted towards a girl child and
her financial needs such as education and marriage. However, as the exact age
at which she would require the funds is uncertain, the scheme tries
to be flexible. The investors, on the other hand, need to keep in mind five
important years or time spans before taking the plunge in SSY. Consider, for
instance, the girl child's age, and the time left for her education and
marriage.

Opening an account (0-10
years)

An SSY account can only be opened in the name of a girl child
(beneficiary) below 10 years, as on the date of the opening of the account. The
date of birth proof is, therefore, essential. The rules allow for the opening
of a maximum of two accounts for two girls in a family. One can't open two
accounts for one girl. The girl child's age is very important to find out the
duration of the scheme. Here's why:

5 years

The request for the first premature closure of an SSY account can
be put forward after the completion of five years of the account opening. That
too, as per the rules, on extreme compassionate grounds such as medical support
in life-threatening diseases. Still, if the account has to be closed for
another reason, it will be allowed, but the entire deposit will only get
interest of a Post Office Savings Bank account.

10 years

When the beneficiary, i.e., the girl child crosses the age of 10,
she can operate the account on her own. She can make any future contributions
to her own account. The parents, too, can continue to deposit in the same
account.

15 years

To open an SSY account, a minimum initial deposit of Rs 1,000 is
required. Thereafter, a minimum of Rs 1,000 up to a maximum of Rs 1.5 lakh can
be deposited in the account annually. To keep the account active, deposits need
to be made only for the initial 15 years. For a 9-year-old, deposits have to
continue till the child turns 24. Between ages 24 and 30 (when the account
matures), the account keeps earning interest on the balance.

SSY is a long-term investment scheme. The partial and full
withdrawal window is sacrosanct subject to applications made to foreclose the
account prematurely.

18 years

The next window for withdrawals is allowed when the girl turns 18.
And the rules make it clear that the funds are for her needs and not used for
any other purpose. A maximum of 50 per cent of the account balance of the
preceding year may be withdrawn for the purpose of higher education of the
girl.

For this, not just a written application, but a documentary proof
in the form of a confirmed admission offer in an educational institution or a
fee slip from such institution clarifying such financial requirement is
required. Further, the withdrawal amount will be restricted to the actual
demand of fee and other charges required at the time of admission as shown in
the offer of admission or the relevant fee slip issued by the
institution.

21 years

Irrespective of the age, the SSY account will run for 21 years
from the date of its opening. So if the girl child's age is 9, the scheme will
mature when she turns 30. The rules, however, permit final closure anytime
before 21 years if the parent files an application for such premature closure
for the purpose of her marriage and confirms through an affidavit that the
applicant is not below 18 years on the date of marriage. At times, this could
be a roadblock as the closure is subject to conditions as seen above.

The attractiveness

SSY carries the highest tax-free return with sovereign guarantee
and comes with the exempt-exempt-exempt (EEE) status. The annual deposit
(contributions) qualifies for Section 80C benefit and the maturity benefits are
non-taxable. SSY can be opened in a post office or a bank. One can also make
deposits through electronic means, i.e., e-transfer to the concerned post
office or bank if either has access to the core banking facility.

Alternative
investments

SSY is a dedicated scheme for a girl child's needs. Public Provident
Fund (PPF), a 15-year scheme that also comes with loan and partial withdrawals
facilities, can be an alternative. Although a PPF account
can be extended in block of five years after the initial 15 years, the
possibility of funds being used for other purposes exists.

As per the rules, at any point of time, the interest rate of SSY
will always be higher than that of PPF. For both schemes, the government fixes
the interest rate on quarterly basis based on the G-sec yields. The interest
rate and spread that SSY enjoys over the G-sec rate of comparable maturity is
75 basis points compared to PPF's 25.

Currently, the interest rate of SSY is 8.5 per cent per annum
compounded annually, while it is 8 per cent per annum for PPF. Mark the date in
SSY as there will not be any interest on the amount deposited after the 10th
for that specific month. Even when compared to traditional life insurance
plans, SSY scores higher, especially when combined with a term insurance
plan.

Conclusion

Estimate how much inflated-adjusted funds would be needed for the
education and marriage of the girl child. SSY is a debt investment, therefore,
for a long-term need, relying more on equities helps. One may use it to invest
a portion of the funds earmarked for the girl child's needs and not entirely
depend on it.

This could apply even to those who have exhausted their annual
Section 80C limit of Rs 1.5 lakh. Simultaneously, buy a pure term insurance to provide
adequate life cover to the financial dependents. Understandably, for younger
kids, the time duration for accumulating funds would be more compared to those
nearing 10 years, but still SSY can be a part of one's portfolio.